Contracting is a liability

Deciding who is liable for what is the sticking point of many an IT contract, but a balance can be found

Alistair Maughan is a partner in the law firm Morrison & Foerster's London office. He leads the firm's UK outsourcing team and is co-chair of the firm-wide Technology Transactions Group. Maughan focuses on outsourcing and technology-based projects for major companies and public sector organisations.

January 23, 2012

CIO

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The hardest part of an ICT contract to negotiate is usually the liability clause.

This stipulates who pays what should something go wrong, what types of loss can and can’t be recovered and, most controversially, the maximum liability of either party in the event that something does go wrong.

This particular topic always seems to lead to a ritual dance around some fairly well-rehearsed issues.

It’s a bit chicken-and-egg in that no-one wants to agree the liability exposure without knowing the overall level of risk and value, but then the price partly depends on the liability exposure.

But it’s frustrating that every negotiation seems to start from square one without there being a recognition by either the customer the or service provider of some of the realities of their current situation.

Too often, I seem to be faced with untenable negotiating positions: the customer who expects a service provider to pick up uncapped liability, and the service provider who refuses to accept responsibility for its customer’s obvious potential losses.

The resolution usually lies in the recognition that the right solution is a balance of the two parties’ interests which enables them both to feel as if they have got a fair deal.

So, for example, customers often over-egg their demands for liability protection and seek to set liability clauses against the worst case, even though in reality the effects of mitigation (which will be legally required anyway) may bring the maximum possible claims down to a more moderate level.

Likewise, ICT service providers are routinely disingenuous about potential exposure. Modern ICT contracts sit close to the heart of customers’ operations, but many service providers cling to old norms on liability clauses that were developed when potential exposures were much different.

It therefore seems unfair to seek to apply outdated expectations of low caps on liability (or areas where liability is completely excluded) to the current generation of increasingly high-value, lucrative contracts.

Protracted negotiations could be an awful lot shorter if customers stopped setting liability expectations against the worst case, and if service providers were prepared to accept the downside of liability exposures commensurate with the upside of the profits available from the services that they now provide.

Next month, I’m going to offer suggestions on a few areas where agreement on liability issues ought to be easy to reach.